Arbuthnot’s Gilliat Hedges Counterparty Risk for Wealthy Clients

Gilliat Financial Solutions, a unit of Arbuthnot Banking Group Plc (ARBB) that designs and sells structured products, is offering wealthy depositors the chance to reduce counterparty risk while receiving a return tied to the stock market instead of interest payments.

Gilliat places the deposits across five banks to reduce the risk posed by one going bankrupt, the London-based firm said in a March 5 statement. Customers stumping up at least 50,000 pounds ($79,000) for five years benefit from increases in the U.K.’s FTSE 100 up to a maximum 34 percent and don’t lose out if the index declines.

When Lehman Brothers Holdings Inc. collapsed in 2008 it was a counterparty in trades across the world, worsening its impact on the deepest financial crisis since the Great Depression. Mutual-fund manager Eaton Vance Corp. (EV) and SIX Swiss Exchange Ltd., the operator of the Zurich bourse, also marketed structured products this year designed to mitigate such risks, according to data compiled by Bloomberg.

“A lot of people have been conscious of counterparty risk,” said Adrian Neave, the managing director of Gilliat in London. “But we now see product providers catering more for those concerns.”

Gilliat deposits the money from its high-net-worth clients equally between Julian Hodge Bank Ltd., Kleinwort Benson Group Ltd. (KBL) and OneSavings Bank Plc, as well as its own affiliates Arbuthnot Latham & Co. Ltd. and Secure Trust Bank Plc, the firm said in the statement.

Main Street

Gilliat said it developed the so-called structured deposits with De Montfort Professional Wealth Management LLP in Rugby, England, to give clients the opportunity to diversify deposits away from typical U.K. Main Street lenders. The five banks involved in the product are authorized as financial services firms, meaning customers’ deposits are guaranteed by the British taxpayer up to a maximum of 85,000 pounds per bank.

Gilliat said the product is designed to appeal to U.K.- resident clients seeking higher returns than traditional deposits while wanting to avoid risky investments.

Structured deposits combine a traditional bank account and an investment product, with the return depending on the performance of an underlying asset rather than an interest rate. The FTSE 100 index that backs Gilliat’s offering rose 5 percent since Dec. 30 and dropped 13 percent in the past five years.

“Investors are currently cautious of equity investment but are receiving poor returns on monies held on deposit,” John Boss, a senior partner at De Montfort, said in the statement. “This plan is hopefully the first in a series trying to address these concerns.”

To contact the reporter on this story: Alastair Marsh in London at Amarsh25@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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